The S&P 500's 5 Most Loved Stocks

Even with a nearly 30% return from the S&P 500 last year, short-sellers wouldn't dare bet against these five well-loved S&P 500 stocks.

The broad-based S&P 500(SNPINDEX:^GSPC) may have kicked off 2014 on a sour note with three consecutive down sessions, but few will deny that 2013 was an amazing year, with the index gaining nearly 30% with few modest retracements.

The backbone of this seemingly endless rally has been stronger-than-expected GDP growth from the U.S. economy (up 4.1% in the third quarter), strong manufacturing data, an ongoing rebound in housing prices, and slow but steady improvement in unemployment, which fell to 7% as of the latest report. In other words, the U.S. economy is giving investors plenty of reasons for this rally to continue even higher.

But on the other side of things, we still have skeptics who would point toward valuations and a lack of organic growth as all the more reason why stocks, and the S&P 500, may be overvalued here. With the recession still fresh in many investors' minds, pessimists are hoping to seize on those fears in 2014 and push the S&P 500 lower.

Despite this ongoing tug-of-war between optimists and pessimists, there exists a select group of companies within the S&P 500 that few investors would dare bet against. I like to refer to these companies as the S&P 500's five most loved stocks. As we've done in previous months, I suggest we take a closer look at these five S&P 500 components to determine what characteristics, if any, they share, because stocks that carry few short-sold shares could be more inclined to head higher.

Month in, month out, it's the same old story with conglomerate Berkshire Hathaway among the market's least short-sold companies. I really don't blame pessimists for keeping their distance, given that Warren Buffett's holding company announced another strategic purchase last week, this time of Phillips 66 pipeline polymer business, which improves pipeline efficiency, for $1.4 billion. Altogether, Berkshire now holds about 60 different subsidiaries all under one umbrella, and a number of these companies offer inelastic products that perform well in both good and bad economic environments. In other words, Berkshire's diversity is enough to keep the pessimists at bay.

Do investors have a reason to worry?

So long as Warren Buffett remains at the helm of Berkshire Hathaway, I doubt there are too many short-sellers brave enough to bet against the Oracle of Omaha. Because of Berkshire's operational diversity, it's able to generate incredible amounts of cash flow, allowing it to go shopping on a regular basis. With a portfolio full of "boring" companies that simply deliver profits, I'd suggest taking your pessimism elsewhere.

This short interest may actually be somewhat of an anomaly and related to the completion of Perrigo's purchase of Irish pharmaceutical company Elan on Dec. 18. If by some chance it's not related to that transaction, then I'd have to believe short-sellers are turned off by consumers' growing need for over-the-counter pharmaceutical products, as well as nutritional products, which should fuel Perrigo's growth for years to come. In addition, the purchase of Elan gives Perrigo a tax haven that it didn't have previously, which should put even more cash in Perrigo's pockets.

Do investors have a reason to worry?

Although I feel Perrigo made a poor attempt to negotiate with Elan and paid far too much for the shell of a company, I don't believe short-sellers have much recourse reason to bet against Perrigo even after its amazing run in 2013. The fact is that health care costs are higher than many consumers would like to see, and cheaper over-the-counter items provide an opportunity of strong growth over the next couple of decades despite the lower margins associated with OTC products. If my words aren't enough, perhaps the fact that Perrigo delivered record revenue (up 21%), record EPS (up 20% on an adjusted basis), record margins (up 190 basis points), and recorded 13% organic revenue growth in the first quarter should be enough to keep pessimists away.

TE Connectivity Why are short-sellers avoiding TE Connectivity?

Not a lot has changed from the previous month when we looked at TE Connectivity outside of the fact that its short interest has risen ever so slightly. As I noted last month, what makes TE Connectivity a poor short-sale candidate is the fact that there are few downside catalysts in the power connection business at the moment, and TE Connectivity is doing everything in its power to keep pessimists away, such as announcing a 16% increase to its annual dividend last month. Short-sellers tend to dislike dividend-paying companies, as dividends are often the sign of a healthy business.

Do investors have a reason to worry?

There's not much to dislike about TE Connectivity at the moment with the company topping earnings expectations in each of the past four quarters, and at just 13 times forward earnings with a yield now tipping the scales at 2%. Power connection devices should have no trouble delivering mid-single-digit growth throughout the next couple of years, making a bet against TE Connectivity is dicey at best. Unless we see another recession, I don't believe investors should be too concerned.

Loews Why are short-sellers avoiding Loews?

One easy reason short-sellers have avoided Loews is right in the company's description: commercial insurer and owner of 44 offshore drilling rigs. It may not initially appear obvious, but Loews offers basic necessity products, which means consistent cash flow, the enemy of pessimists. Insurers can simply raise their premiums if they run into a rough operating patch while the demand for energy in the U.S. is only rising.

Do investors have a reason to worry?

Unless pessimists have a crystal ball that can predict periods of higher commercial-insurance payouts that also happen to correlate with weaker oil prices, then it's probably not the best idea to bet against Loews. Loews' more than $2 billion generated in operating cash flow over the trailing 12-month period simply proves that it would take luck, not research, for short-sellers to be right in a big way.

Tyco InternationalWhy are short-sellers avoiding Tyco International?

In much the same fashion that TE Connectivity shares have run higher, Tyco International, a supplier of security, fire suppression, and other life safety products, has little reason to be pushed lower with its quarterly results consistently meeting Wall Street's expectations over the past year. Its latest quarter delivered relatively tame 1% organic growth, but at least the areas of top growth within Tyco are its high-margin products and services.

Do investor have a reason to worry?

For a second month in a row, we're going five-for-five that there's really not a lot to worry about with Tyco International. Tyco has ample cash and cash flow to make earnings accretive acquisitions on an as-needed basis to drive growth while it also has the ability to weather minor security orders downtrends by reducing its spending. Unless we are rocked by a serious recession, Tyco International isn't going to offer short-sellers much to work with.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

Author

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and investment planning. You'll often find him writing about Obamacare, marijuana, drug and device development, Social Security, taxes, retirement issues and general macroeconomic topics of interest. Follow @TMFUltraLong